The right and wrong of public-sector companies

The Lahore High Court recently instructed the Punjab government to explain its rationale for creating 56 companies. State-owned entities (SOEs) like PIA and the Pakistan Steel have been in existence for decades but this issue pertains to a new generation of not-for-profit public-sector companies, registered under Section 42 of the Companies Ordinance 1984. Such companies, however, are not specific to Punjab and are also present elsewhere. The federal government’s report on SOEs’ performance review (2013-14) showed that there are 45 non-commercial companies at the federal level within the universe of 190 SOEs. This number would be in hundreds in other provinces.

Why did the governments across provinces feel the need for this rather innovative governance model? What risks do these companies entail and where have the governments gone wrong?

Proliferation of these companies in recent years manifests some serious deficiencies in traditional government structures, which have failed to respond to evolving governance needs. For instance, government departments offer no room to involve top-notch professionals in decision-making neither can they quickly mobilise or deploy domain knowledge experts for highly-specialised subjects. It is becoming increasingly hard to attract civil servants to development projects. The decision-making in government is painfully slow. Wide canvas of responsibilities keep the civil servants swamped with routine activities such as postings, transfers and inquiries, preventing focus on high-priority projects. Moreover, political leaders with a sense of urgency rarely have patience for these snail-paced processes to complete, before they can begin to see any serious work on ground.

Section 42 companies, on the other hand, are run by independent boards, providing an adequate space to involve experts in decision-making. It is far easier to employ market-based talent or high-calibre civil servants and reward them adequately. The corporate structures provide operational flexibility and swift decision-making even in cases like hiring and firing, which may take months in government departments. More importantly, these companies provide a way to ring-fence liabilities and plough back any revenues.

All these benefits, however, come with some hazards. Operational flexibility without adequate controls can lead to transparency issues; private-sector-led boards can have room for conflict of interest; independent working can possibly lead to compromised accountability structures; and adequate incentives for selected few can cause heart-burning and discontent in the rest of the government.

The SECP has issued detailed Public Sector Companies (Corporate Governance) Rules 2013, which apply to Section 42 companies and prescribe adequate controls to address these concerns. For instance, Rule 8 calls for mandatory performance evaluation of board members, including the chairman and CEO based on clearly specified performance contracts. Rule 10 prescribes due and timely preparation of quarterly and annual financial statements, and placing them on the companies’ websites. Companies are also required to have a chief internal auditor and a detailed external audit.

Unfortunately, however, compliance with these rules has been partial at best. Despite the clear set of responsibilities, performance contracts have rarely been used to assess staff performance. Despite their independent structures, these companies often work under the shadow of parent government departments, which make them an extension of bureaucracy. Instead, these companies should be run by fully-empowered boards, which are only required to report to the governments once a year. The government should develop sufficient capacity to manage them. India, for instance, has a dedicated high-powered Public Enterprises Selection Board that is responsible for recruitment and placement of the chairman and CEOs and a department of public enterprises for managing SOE affairs and reporting on their performance annually.

Not only do we need similar structures, but we should also have clear guidelines for appointments of private sector board members, a market-based mechanism for staff appointment that is fair and a clear set of controls, audit and disclosure guidelines that can ensure transparency and earn these companies some credibility.

Published in The Express Tribune, November 5^th, 2017.

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